California Senate Passes Bill to Curb CABs

LOS ANGELES -- The California Senate signed off on legislation that would place limits on school districts’ ability to issue capital appreciation bonds.

Assembly Bill 182, introduced by Assemblymember Joan Buchanan, D-Alamo, and Senator Ben Hueso, D-San Diego, and supported by Treasurer Bill Lockyer, would require the ratio of total debt service to principal for each bond series to not exceed four to one. It would also require bonds with maturities greater than 10 years to be subject to early redemption.

CABs got bad publicity when the publication Voice of San Diego detailed how the Poway Unified School District in San Diego County sold $105 million of bonds that require nearly $1 billion in debt service at their 40-year maturity, without an option to call the bond. Critics say such structures saddle taxpayers and school districts with massive debt burdens and interest payments.

The Senate passed the bill on Tuesday, sending it back to the Assembly Floor for approval.

“AB 182 would protect taxpayers from abusive bond deals that saddle them with outrageous debt service burdens,” said Tom Dresslar, a spokesman for Lockyer. “At the same time, it would maintain the flexibility school districts need to provide adequate facilities for the children in their communities.”

The bill would also increase transparency, and ensure the “ball’s not hidden” from school board members when they’re deciding whether to approve the issuance of CABs, he said.

AB 182 was introduced in January after media attention brought to light situations where capital appreciation bonds had been issued with repayments at a 10 to 1 ratio of debt to payments — and sometimes as high as a 20 to 1 ratio.

CABs pay a compounded interest rate and principal upon maturity instead of through regular payments over time.

Under existing laws, the bonds are required to bear a rate of interest that does not exceed 8% per year and a maturity not to exceed 25 years.

Some school districts have used CABs as a way to finance construction projects despite sluggish property-tax revenue growth amid legal limits on the amount of debt they can take on. The bonds allow them to defer debt-service payments in the short term, avoiding property-tax rate increases, but incurring higher costs in the long run.

“With passage in the Senate yesterday, we are one step closer to AB 182 becoming law,” Buchanan said in an emailed statement. “AB 182 will not prohibit the use of capital appreciation bonds, but will establish reasonable parameters for school and community college issuances, saving the taxpayers of California billions of dollars in capitalized interest.”

If the Assembly approves the bill with the Senate’s changes, it will head to Gov. Jerry Brown’s desk for his signature.

The California Legislature has until Sept. 13 to pass bills this year.

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